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Bankruptcy and Taxes

Many people are unable to repay their debts and file for bankruptcy due a number of reasons, often beyond their control, such as loss of job, medical emergencies caused by illness or accident, business losses or change in government policies which can adversely affect a small business.

If a person is unlikely to earn money to repay the debt in future, filing for bankruptcy is the best way to get rid of debtors who may be making the life of the borrower difficult. The borrower can also take advantage of the provisions of the law regarding bankruptcy and taxes, where the ability of the individual to repay the taxes is considered and the taxes may be waived off if the person filing for bankruptcy meets certain conditions.

A person who is indebted and unable to repay his debtors may file for bankruptcy under chapter 7 or chapter 13. There is a provision for waiving the taxes for both the cases of bankruptcy. While a person filing under chapter 7 can have all his debt waived, a person filing under chapter 13 will have to repay some of his debt in installments.

For a person filing for bankruptcy, the tax debt of an individual can be waived off under the following conditions:

  • The due date for the tax returns pertains to a period which is more than three years before the bankruptcy filing date.
  • The tax returns were filed more than two years ago.
  • The tax assessment is more than 240 days old.
  • The tax returns were not fraudulent.
  • The person filing for bankruptcy is not guilty of intentionally trying to tax evasion.

This takes into account the fact that the person who is filing for bankruptcy no longer has the funds to pay the taxes which were due many years ago, and there is no point wasting time, money and effort to force the person to pay taxes when he does not have the money or is unlikely to have sufficient funds in future also.

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